If you’re currently paying more than 2.4% interest on your home loan in Singapore, it’s time to consider refinancing and potentially save some serious cash. Refinancing your home loan means switching to a lower interest rate, which can significantly reduce your monthly repayments. Whether you choose to switch to a new loan package within your current bank or switch banks altogether, here’s everything you need to know about refinancing in Singapore.
What is Refinancing?
Refinancing a home loan gives homeowners the opportunity to switch their loan to another bank that offers a lower interest rate. By doing so, you can save money in the long run. Typically, people consider refinancing when they reach the fourth year of their home loan. This is because after three years, most home loan packages tend to increase their interest rates. So, it’s the perfect time to explore if another bank can offer you a better deal.
Aside from interest rates, refinancing may also be a good idea if you expect an increase in SIBOR (Singapore Interbank Offered Rate) and SOR (Swap Offer Rate) rates. These rates determine the interest rates for some home loans. The Monetary Authority of Singapore (MAS) and The Association of Banks Singapore (ABS) closely monitor and adjust these rates on a daily basis due to global economic changes. So, if an increase is predicted, switching to a lower interest rate loan becomes even more attractive.
How Much Can You Save by Refinancing?
Let’s look at an example to illustrate how refinancing your home loan can lead to significant savings. Imagine Ms. Liana, who has an outstanding home loan of $300,000 with about 20 years left. Her current interest rate is 2.6%, resulting in a monthly repayment of approximately $1,604.36.
Now, let’s say a bank offers her a home loan package for the first three years with an interest rate of 1.8%. If she takes up this offer, her monthly repayment will decrease to around $1,489.40. That’s a monthly saving of about $115, which amounts to $1,380 per year and $4,140 over three years!
Of course, this is a simplified illustration. In reality, there are other factors to consider, such as the lock-in period and associated costs like legal charges and valuation fees. However, understanding the true cost of refinancing will help you make an informed decision.
When Should You Start Looking to Refinance Your Loan?
While you can technically refinance at any time, it’s crucial to wait until your lock-in period is over before making a move. Attempting to refinance during the lock-in period usually incurs a penalty fee of around 1.5% of your outstanding loan amount.
However, you don’t have to wait until the lock-in period is over to start the refinancing process. Newly-signed refinancing contracts are valid for six months, so if you’re in a rising interest rate environment, it’s wise to secure a good home loan package as early as possible. Just remember that you need to give at least three months’ notice before you can refinance.
Typically, bank loans have a lock-in period of two or three years. To ensure you don’t end up paying a higher interest rate, it’s best to start your refinancing application process around four months before the date of the rate increase. This accounts for the three-month notice period you need to serve with your current bank and the application time with the new bank.
If you’re lucky, you might have signed up for a home loan package with no lock-in period during a price war between the banks. In such cases, you have more flexibility when it comes to refinancing.
What is the Cost of Refinancing?
Refinancing your home loan incurs various costs, such as legal fees, valuation fees, and potential prepayment penalties during the lock-in period. However, some of these costs can be subsidized by the bank under certain circumstances. For instance, if you have a large loan amount, banks may be willing to defray the legal fees with subsidies. Typically, this is done for outstanding loan amounts above $500,000.
While subsidies may sound enticing, carefully consider the terms and conditions attached. Many subsidies come with a “clawback period,” which means you need to stay with the bank for a certain duration before you can refinance without penalty fees. Essentially, this becomes a new lock-in period for your new home loan. If you don’t stick with the bank for the entire duration, they will claw back the subsidies provided.
Another cost to consider is the cancellation fee if you refinance when the property is still under construction. For buildings that are being constructed, the home loan amount is disbursed in stages. The cancellation fee is typically around 1.5% of the undisbursed loan amount.
Repricing vs. Refinancing: What’s the Difference?
If you’re unhappy with the increasing interest rates of your current home loan, you have another option apart from refinancing: repricing. Repricing involves staying with the same bank but switching to a new loan package they offer.
The process of repricing is usually shorter compared to refinancing, enabling you to switch to a lower interest rate package sooner. Repricing eliminates the need for legal fees and a new valuation of the property. However, it may not necessarily be cheaper than refinancing, especially when you consider refinancing packages that come with legal fee subsidies.
| Cost of refinancing | Cost of repricing |
|---|---|
| Legal & valuation fees: $300 to $500 (or none, if subsidized by the bank) | Administrative fees: $500 to $800 |
| Total cost: $300 to $500 | Total cost: $500 to $800 |
Banks often prioritize attracting new customers over retaining existing customers. As a result, you’re more likely to find a more competitive interest rate when refinancing rather than repricing. To make an informed decision between refinancing and repricing, focus on the cost. In most cases, repricing is ideal for homeowners with a small outstanding loan amount of $200,000 or less, as the cost of refinancing may outweigh the savings.
Bottom Line: To Refinance or Not to Refinance?
If your outstanding loan amount is above $500,000, you should seriously consider refinancing. Most banks will absorb the legal fees, making refinancing much cheaper. Plus, with the current low-interest rate environment, you can easily secure a mortgage with rates as low as 1.29% per annum, significantly lower than HDB’s 2.6%.
For outstanding loans below $500,000, you still have options, but fewer banks will subsidize your legal fees. In this case, explore both refinancing packages with legal fee subsidies and the repricing options offered by your bank.
Regardless of your decision, you can simplify the process by refinancing through MoneySmart. Our mortgage specialists will gather the best home loan packages for you, saving you from trawling through multiple banks’ websites. We’ll also provide unbiased advice and help you understand the costs involved. Best of all, our service is completely free, so you have nothing to lose if you decide not to refinance after all.
Assessing whether to refinance your home loan in Singapore involves several factors. Contacting a Mortgage Specialist at MoneySmart for a free consultation can help you make sense of it all.